ST. PAUL -- Minnesota authorities intent on recovering thousands of dollars in lost tobacco taxes have set their sights on Interstate 94, just west of the Minnesota-Wisconsin border.
Officials say smugglers have been bringing in tobacco products by the truckload from Indiana, where the tax is one-fourth of what Minnesota charges. They sell the products here to wholesalers and retailers and on the black market, and the tax is never collected.
But the Minnesota Department of Revenue has ramped up efforts to deter the sale of untaxed tobacco by partnering with law-enforcement agencies and cracking down on local businesses selling the products.
Much of their focus has been on the east metro. Five major busts have occurred near the St. Croix Weigh Station on Interstate 94 in Lakeland since 2016.
“Look at a map,” said Rick Hodsdon, the prosecutor who has been handling the tobacco cases in Washington County. “Tobacco is real cheap, comparatively, in Indiana. You get on I-90 and when you get to Madison, you take 94 up to the Twin Cities. It’s a pipeline.”
In 2018, Minnesota collected $501,714,000 in taxes on cigarettes and $103,337,000 in taxes on other tobacco products.
A stop: On guard when stories don't add up
On June 2, 2016, a state trooper spotted a yellow Penske rental truck speed past the open weigh station on I-94. The driver, Mohammed Abdul Majid, 31, of Bridgeview, Ill., wasn’t wearing a seat belt.
Iman Gencehan Ugurlu, 32, also of Bridgeview, sitting in the passenger’s seat, said they were headed to Hudson, Wis., but missed the exit. Ugurlu claimed they had started in Beloit, Wis., and had been following directions on his cellphone but “got turned around,” according to a criminal complaint filed in Washington County District Court.
The trooper grew suspicious after Majid could not produce documents required for driving a commercial truck.
Ugurlu told the trooper he had picked up the truck at Statewide’s warehouse in Beloit, but the Penske rental agreement showed he had rented it that morning in Chicago Ridge, Ill., according to the complaint.
When the rear door of the Penske truck was opened, investigators found it “completely loaded” with $78,017 worth of tobacco products, according to the complaint.
Had they bought it in Minnesota, where the wholesale tobacco tax is 95 percent, they’d have paid $74,116 in taxes.
But at Indiana’s 24 percent wholesale tax, they paid just $18,724.
It’s illegal to bring more than $1,400 of tobacco into Minnesota without paying taxes.
The men pleaded guilty in May 2017 to felony-level aiding and abetting in the sale of untaxed tobacco. They were sentenced to five years probation and had to pay administrative fees and fines and $74,116 in restitution.
‘They tend to be bad drivers’
The traffic stop occurred just a few days after Revenue Department officials conducted a training session with Minnesota State Patrol troopers on tobacco interdiction. The session, the department’s first, focused on training troopers about what to look for and what questions to ask if they ever pulled over a vehicle for a traffic violation and “discovered more tobacco than would be typical for individual consumption,” said Melanie Leslie, interim director of the Revenue Department’s criminal investigations division.
Among the questions troopers have been trained to ask: “Is there an invoice for this tobacco that shows the taxes paid?” and “Do you have a distributor’s license?”
“If they have reason to believe it’s untaxed,” Leslie said, “they would refer it to our unit.”
Hodsdon, whose office is full of boxes containing tobacco-smuggling case files, said some of the traffic stops have been almost comical.
“They tend to be bad drivers,” he said. “One guy was sleep-deprived — he was making a run down and back. Another guy just ran out of gas. The trooper pulled up thinking they were going to do a motorist assist, and it turns into a major tobacco-smuggling case.”
Out of gas with truck filled with tobacco
The man who ran out of gas, Jawad Kadim Al-Maliki, 36, of Fridley, Minn., was charged in March with one felony count of possessing untaxed tobacco products.
A trooper encountered Al-Maliki’s rental truck blocking the westbound I-94 ramp to Manning Avenue on Dec. 15, 2018. Al-Maliki told the trooper he was on his way from a furniture store in Wisconsin, “where he picked up new home furniture for the holidays,” the complaint states. “He (said) he had run out of gas, and his brother went to get more.”
More than $49,000 in untaxed tobacco products were found in the truck’s rear cargo area. The taxable amount was $46,662, according to investigators.
Records obtained from Enterprise showed Al-Maliki had rented from the company 16 times between June 2017 and December 2018, according to the complaint.
“One wonders why he would be spending money to rent and drive an empty truck around,” Hodsdon said. “These are just the ones we’ve caught. This is hundreds of thousands of dollars.”
Cigarettes have tax stamps, other tobacco doesn't
The men arrested have been caught with untaxed tobacco products such as cigars, chewing tobacco and pipe tobacco — not cigarettes, which are stamped with a tax stamp, she said. Other tobacco products are taxed but not stamped.
Cigarette packages are easy to stamp, said Jeff Slater, investigations supervisor for the Department of Revenue. “Other tobacco products are all different types of sizes and shapes, and it would be a lot more expensive and harder to stamp them,” he said.
Said Hodsdon: “It’s really obvious if you walk into any tobacco place, and you see the cigarette packages sitting on the shelf. If they don’t have a Minnesota stamp, you know right away they are illegal.”
Hodsdon said he hopes members of the public will help investigators by reporting wholesalers and retailers selling untaxed tobacco products.
“These men wouldn’t be committing these crimes if there weren’t wholesalers and retailers also willing to break the law by selling untaxed tobacco,” he said. “Clerks know when product comes in from legitimate tobacco distributors and when it comes in from the back of a Sienna van or a Penske truck. If good whistleblower citizens assist local law enforcement, I’m sure they would be happy to hear what they have to say.”
Focusing on I-94 to crack down on untaxed tobacco products makes sense because it is a major freeway and has a weigh station and a larger concentration of troopers in the area, Slater said. The troopers’ success has led the state to develop a training webinar for troopers on targeting tobacco smuggling, Leslie said.
Where does state rank?
Minnesota has the seventh-highest cigarette tax in the U.S., and ranks fifth in net cigarette smuggling, according to the Tax Foundation.
The state’s smuggling rate increased significantly after the Legislature passed a 130% excise tax increase on cigarettes in 2013, said Michael LaFaive, director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy in Midland, Mich.
“It’s not surprising that (other tobacco products) are smuggled, as well as cigarettes,” LaFaive said. “As the price differential between two sources increases, consumers and large-scale smugglers will look to save and make a buck trying to arbitrage the difference between the two prices.”
Smugglers once were busted bringing cigarettes “from China through a New Jersey port that were then scheduled to be shipped by truck to California with the expectation of profit,” he said, “so it does not strain credulity to suggest that these smugglers might be willing to cross a couple of states to make money.”
What happens to confiscated tobacco?
Once it is seized, the tobacco is considered contraband, “so we can’t give it back,” Slater said. The products are stored in two humidity-controlled areas — both the size of a typical office — at the Revenue Department in St. Paul.
“It’s technically evidence of a crime that has been committed,” Leslie said. “Once a case is settled … and it is past the appeal period, then we destroy it.”
Shred Right of St. Paul, a company contracted by the Revenue Department, takes the tobacco to an undisclosed location and burns it.